Despite volatility and macro-economic headwinds, Sanjay Dongre, senior vice-president and fund manager, UTI Mutual Fund, tells Puneet Wadhwa he has increased exposure to interest rate-sensitive sectors and expects the cement and infrastructure spaces to do well in the medium-term. Edited excerpts:
With the results season kicking off and the coming review of the monetary policy, do you think global cues could play second fiddle to domestic factors for a while?
I think both domestic as well as global factors are equally important from the Indian stock market’s point of view. Domestic factors, such as monetary policy review by the Reserve Bank of India (RBI) and measures to reduce fiscal deficit, will determine extent and timing of growth recovery in the Indian economy.
On the other hand, recessionary conditions in advanced countries may impact the exports growth prospects. Any large scale financial instability in the US/Euro region may lead to financial crisis in the global economy and may impact the risk appetite (risk ‘on’ or risk ‘off’) for capital flows into the country in the short to medium term. It could have large bearing on the growth trajectory of the Indian economy in the medium term.
What are your expectations from the June quarter results season? Do you think inflation, the rupee and crude oil movement can severely dent corporate earnings over the next few quarters?
Earnings for the April-June quarter will not be significantly different from the recent quarters. While the revenue growth is likely to be in double digits, the margin pressure will continue to impact the overall earnings. I expect the earnings growth of the Sensex companies to be in low single digit.
We will continue to see consumption-driven sectors, such as FMCG (fast-moving consumer goods) and pharmaceuticals, do well in the recently concluded quarter, but infrastructure, power, capital goods and oil and gas would continue to struggle. For these sectors to do well, interest rates have to soften more to kick-start the investment cycle in the economy.
Rupee depreciation may benefit the export-oriented sectors like software and pharmaceuticals, while it may impact sectors like capital goods due to net import status. Telecom and infrastructure sectors will also get impacted due to the rupee’s depreciation.
The markets world over have swung between bouts of hope, optimism and pessimism in the first half of the current calendar year. What has been your investment strategy in such an environment? What returns have you been able to generate in the schemes you manage?
In the last six-nine months, it was very evident that interest rates in India have peaked. Crude oil prices have declined 20 per cent from the top and most of the commodities have witnessed a drop of at least 10 per cent in the last six months.
Against the background, we have been following the strategy of reducing the exposure to defensives and have increased exposure to the interest rate-sensitive sectors. This strategy has worked very well in the last six months. Our diversified funds performed very well and have beaten the benchmark indices in the last one year.
Do you think it is a good time to bet on the mid-cap space? Can you suggest a few themes / sectors from this space that could do well, going ahead?
Mid-caps are most vulnerable in high inflation, high interest rates and a slower growth environment. Hence, it may not be a good time to bet on the mid-cap space. Investors can look at this space once RBI cuts interest rates by 100-150 basis points cumulatively.
A lot of news has been flowing in regarding the off-beat sectors like sugar and telecom. Do you think the tide is turning for these sectors? How should investors approach them?
In the sugar sector, production has exceeded demand in the last three years, resulting in accretion to the inventory levels. Hence, sugar prices are unlikely to run away in the short term. With elevated levels of sugar cane prices, the profitability of sugar companies may continue to remain under pressure.
The telecom sector has been undergoing serious challenges and regulatory uncertainty may continue to impact the valuations of the telecom sector. Steep spectrum prices may lead to cost escalation, both on the capex and opex front, thereby impacting the profitability of the sector significantly. However, another 10 per cent fall could make the stocks attractive as most of the negatives would be priced in.
What about the infrastructure sector given the outlook for interest rates?
With expectations of decline in interest rates, going forward, this space looks attractive from a medium-term perspective.
What about the cement, textiles and fertiliser sectors? Are they a good contrarian bet in this environment?
The demand-supply gap may narrow down significantly in the next 18-24 months in the cement sector. Setting up a greenfield capacity is becoming difficult on account of land acquisition, limestone mines and environmental issues. Thus, the cement sector is an attractive opportunity from a medium-term perspective.
Though the rupee depreciation may benefit the textile sector, the slowdown in key markets like the US and European Union may continue to put pressure on the revenue and profit growth of the textile sector.
As regards the fertiliser space, players expect key reforms, especially in the area of urea pricing, which once undertaken, would be beneficial to urea manufacturers.